1) Determine how much you can afford to spend on a car
Knowing how much you can afford is important when buying your first car as it influences your loan application process and the type of car you will be able to purchase. When you have a budget, you can easily assess your monthly income and average monthly expenses. If not, ensure you put aside time to calculate these figures.
While this preliminary exercise is not definitive, it’s a good starting point in evaluating your finances. You may even notice areas in which you can decrease your expenses and save more towards purchasing your car. A good tip is to save for your new car by setting up a monthly standing order.
Additionally, other costs associated with purchasing a car are often overlooked and need to be considered. There are closing and one-time fees which can include lawyer fees, valuation reports, management fees and a down payment (if required). If buying a used car, there are expenses such as pre-purchase car checks as well as registration and transfer of ownership fees. Other ongoing costs include car maintenance, annual car insurance and gas.
2) Understand the differences between buying a new vs a used car
When considering the car that you can afford, there’s a cost difference between buying a new car and buying one that’s used. The monthly payment and insurance cost for new cars are more expensive up front and the value depreciates instantly once the car is driven. However, new cars are more reliable and include a warranty on parts and service.
Used cars cost less, have lower insurance premiums and the depreciated value has already been incurred by the previous owner. On the other hand, used cars may require repairs sooner and more often and this maintenance is not covered under a warranty. If you purchase a used car, you must also pay for a valuation which is an assessment of the monetary value of the car. Also, bear in mind the cost to have each potential car you consider purchasing checked by a mechanic regardless of whether or not you buy it. This is an important step as it helps to prevent you from buying a car in poor condition. If you opt for a used car, ensure that you research the dealer as well as a reliable mechanic to assess the car you intend to purchase.
3) Consider the various options to finance your car purchase
Believe it or not, you do not need a down payment of 10% to buy a new car as some banks offer up to 100% financing. But if your aim is to reduce your monthly installment and you can afford to put more into the purchase up front, you should make a down payment.
In determining what you can afford, the bank will also consider your income, expenditure, net worth, available funds and credit rating.
Here are some useful terms to be aware of:
- Fixed interest rate: The interest rate stays the same for the term of the loan. Pre-payment charges are applicable if the loan is fully repaid in a lump sum payment ahead of schedule.
- Amortized term: The amount of time needed to pay off the loan in full (typically 5 to 7 years).
4) Choose the car that meets your needs, lifestyle and budget
Once you’ve confirmed that you qualify for a loan, you likely can’t wait to buy your new car, but research is equally important. While some people may prefer to start with the brand of car they prefer and search for models within their budget, others may not have a car preference and simply use their budget to influence their choice.
For the car you’re considering, some questions to ask yourself include:
- What are the reviews? Have there been recalls?
- Is the trunk space adequate for my lifestyle?
- Will this be a good fit for me or my family’s current and future needs?
- Do I want add-ons and personalisation? If so, what are the additional costs?
When you break it down step-by-step, you may find the path to car ownership is not as complicated as you thought. Following these tips will ensure that you are well informed and prepared to make the right personal and financial decisions when it comes to purchasing your first car.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.